Sources: Vonage Is Eyeing the Exits

Several media reports last week have Vonage Holdings Corp. holding a $400 million to $600 million IPO as soon as this fall, but don't expect Vonage to be turning away any qualified suitors.

Most notably, The Deal.com reported Wednesday that Vonage was looking to go public, citing “sources familiar with the matter.” Interestingly, the story broke on the same day that Google (Nasdaq: GOOG) announced its entrance into VOIP with Google Talk (see Google Talks the Talk).

Light Reading has learned that some investment bank activity is only adding to the chatter. A well-placed source tells Light Reading that as many as ten investment banks participated in a "bake-off" two months ago to select which ones would participate in a possible Vonage IPO.

No winners have been announced, but the banks together stand to make a cumulative $42 million on a $600 million Vonage IPO, our source says.

But in the face of flattening voice prices, heightening competition from RBOCs and cable companies, higher costs for new customer acquisitions, and the threat of left fielders like Google Talk and Skype, answering every three months to investor expectations sounds like a bad case of heartburn for Vonage CEO Jeffrey Citron.

Indeed, conversations with Citron during the past year suggest the company is just as interested, if not more, in being acquired.

There may be some very good reasons for that. “The market position they’re in now can only get weaker; six months ago they had 50 percent of the market of paying residential customers in the U.S., but now Time Warner Cable has surpassed them," says VOIP industry analyst Jon Arnold of J. Arnold and Associates.

Arnold says that Vonage will need to win new customers from RBOCs and cable companies that are able to sell voice as part of a triple bundle, something Vonage cannot do (see Citron: Triple Play Is Tripe).

“If you are a public company you have to report earnings every quarter and meet expectations,” Arnold says. “So if I’m them, I’m thinking that an acquisition is a much cleaner exit strategy.” Even though Vonage is apparently considering an IPO, The Deal.com's story does say the company is pursuing a “dual-track” approach to liquidity, meaning that it would explore the IPO option while at the same time entertaining suitors. Meanwhile, Vonage has remained silent on the matter. Light Reading's attempts to reach Vonage for comment were unsuccessful Thursday, Friday, and Monday.

Vonage does face several challenges in the market -- not the least of which are the RBOCs which can leverage their ownership of the pipe that delivers the VOIP (see Insider Sees VOIP Battle Royal).

But the entire VOIP market is growing fast, and that bodes well for Vonage. According to research released Thursday by Infonetics, North American residential VOIP subscribers will jump from 1.1 million in 2004 to 24.3 million in 2008, with over 6 million new subscribers added in 2006, 2007, and 2008 (see VOIP Equipment Revenue Up 18%).

Also, Vonage’s bring-your-own-access model has not been a liability to the company’s growth so far. Vonage has proven adroit at enlisting the FCC whenever any broadband provider has attempted to block or degrade Vonage service (see FCC Rules on Vonage). The FCC took swift action against Madison River Communications earlier in the year when the carrier blocked ports carrying Vonage traffic (see Vonage Victorious in Blocking Case).

Finally, whatever path Vonage chooses, it has the added prestige of showing that it can raise money and win customers -- a noteworthy charm for investors and suitors alike. Vonage raised $200 million in capital in May, in a round led by Bain Capital, bringing its total capitalization to $408 million (see Vonage Raises Another $200M).

"With the latest infusion of capital, Vonage is poised to achieve its goal of becoming a billion dollar business,” Citron said at the time.

— Mark Sullivan, Reporter, Light Reading

geof hollingsworth 12/5/2012 | 3:03:48 AM
re: Sources: Vonage Is Eyeing the Exits for someone who was charged by the regulators with illegal trading and fraudulent bookkeeping during the market boom of the 1990's and agreed to pay the SEC $22.5 million as part of what the SEC said was one of the largest securities fraud settlements ever, to now be the CEO of another boom-era IPO? Didn't we learn anything from the bubble about the importance of requiring companies that are provided the priveledge of access to US capital markets to be run by executives of character instead of, well, crooks?
geof hollingsworth 12/5/2012 | 3:03:45 AM
re: Sources: Vonage Is Eyeing the Exits I don't think I am a Polyanna, but this is not Martha Stewart "forgetting" about a $60K stock profit. I think this smells pretty bad. His head trader at Datek (also charged by the regulators) had a history of regulatory infractions and close ties to Robert E. Brennan, the former penny-stock promoter who is banned from the securities industry and I think may still be a guest of the State. Seriously bad guys.

The bankers may be willing to do anything for a fee, but they still have to sell it to newly-independent investors, and I hope they take a look and come to the same conclusion that they did with the Claria IPO. There are some deals you just don't want to be associated with.
optical_man 12/5/2012 | 3:03:45 AM
re: Sources: Vonage Is Eyeing the Exits Geoff,
Agree or not, someone gave Mr. Citron money, someone gave him more money, and now Wall Street is backing him.

America is a 'cult of personality' culture.

If Bernie Ebbers got 10 months probation and came back to Wall Street with a new business plan, they would fund it. Admit it. It's happened before.
Because he is a NAME. A NAME is all that matters in America.
Think of all the good NAMES and the bad NAMES.
Both could raise money on Wall Street.
(Reverend Jim & Tammy Baker as an example of another industry; that of ripping off those who believe in "the BIG Church" to impress my friends vs. a simple, low key 'belief in God' to 'save my soul'.)
Don't agree with either of those? Fine. I suggest you follow the latter. It's much cheaper in the long run (and might prove to be more beneficial if you were mistaken about the whole 'funding a Mercedes driving Pastor is my way to Heaven' thing)

I however, have not taken a bus full of Elderly Sightseers hostage, so I don't have a NAME. I'll never be able to raise millions in funding.
I do however have a satifying life, and I'll stick with that.

Last statement, I will never invest in a NAME.
Will you?
I'm anonymous on LR.
geof hollingsworth 12/5/2012 | 3:03:34 AM
re: Sources: Vonage Is Eyeing the Exits The Q2 net additions are pretty impressive, especially at TimeWarner, who added almost 250K net subs during the quarter. NA MSO's now have 1.4 million voice subs, probably more than half of the total NA VOIP customers. It seems to me that this can't be good news for Vonage (or any of the other independent VOIP players). Since the only value Vonage has to an acquiror is its customer base, if MSO's are able to acquire new VOIP customers easily and cheaply through organic marketing, why would they pay a lot of $$ for Vonage?

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